RBC hikes gold forecasts, names two producers that'll outshine

Don't count on gold's record-breaking run being over yet, according to analysts at RBC Dominion Securities Inc., who suggest it could very well push to $1,500 (U.S.) an ounce in early 2011.

In a new research report, RBC hiked its bullion price forecasts by 17 per cent in both 2011 and 2012 and now expects prices to average $1,400 in both years. It sees some easing in following years, but not by much, calling for an average price of $1,300 in 2013 and $1,200 in 2014.

Gold hit an all-time high just above $1,400 on Tuesday.

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"With ongoing concerns over euro zone sovereign debt, the uncertainty surrounding the global financial markets, and the potential for increased concern over deflationary pressures, we reiterate our view that gold and gold equities should continue to perform well into 2011," RBC analysts Stephen Walker, Michael Curran and Naytham Hodaly said in the note. Also supportive: continued net buying by central banks, year-end seasonal physical metal buying and steady investment demand from various gold exchange-traded fund products.

The analysts contend the next pause in the current gold rally probably won't arrive until the Federal Reserve hikes interest rates, which isn't expected until later in 2011 or early 2012. But even then bullion should continue to remain well bid.

Tier I and II gold companies, made up of mid-sized and large producers, are pricing in an average $1,070 long-term gold price, about $300 below the current trading level, so "there is still room for further upside in gold equities," RBC argues.

Upside: RBC particularly likes Barrick Gold Corp. and Goldcorp Inc., a couple of tier-one companies that have so far lagged smaller producers. It hiked its 12-month target price on Barrick by $10 to $75 (U.S.), and raised its target on Goldcorp by $4 to $64.

TMX Group Inc., owner of the Toronto Stock Exchange, enjoyed record equity trading volumes in November and is well placed to benefit from potentially improving financing activity over the next two years, said TD Newcrest analyst Doug Young.

Upside: Mr. Young raised his target price by $1 to $35 but maintained his "hold" rating, noting that the company faces increased competitive pressures.

A site visit to Lake Shore Gold Corp.'s Timmins and Bell Creek mines in Ontario has left RBC Dominion Securities Inc. analyst Stephen Walker with a favourable impression. The Timmins mine remains on track for commercial production by year-end and Thunder Creek shows excellent potential for low-cost bulk mining, he said.

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Upside: Mr. Walker hiked his price target by $1 to $6 and upgraded the stock to "top pick" from "outperform."

Major Drilling Group International Inc. reported second-quarter diluted earnings per share of 48 cents, blowing away the consensus view of 35 cents. Rig utilization should increase in coming quarters and the company is set for record revenues and earnings in fiscal 2012, which starts in May, said Beacon Securities Ltd. analyst Michael Mills.

Upside: Mr. Mills hiked his 12-month target price by $7 to $48 and raised his fiscal 2011 earnings per share forecast to $1.47 from $1.29.

Dollarama Inc., which reported better-than-expected third-quarter earnings, is a likely candidate to be added to the TSX index as soon as Dec. 17, said Desjardins Securities analyst Keith Howlett. The company is one of the few publicly traded retailers in Canada to report strong growth in sales and earnings, he noted.

Upside: Mr. Howlett rates the stock as a "buy-average risk" with a $31 target price.

Darcy Keith is The Globe and Mail's Investment Editor. He has been a business journalist since 1992 and joined the Report on Business in 2010 from Yahoo! Canada, where he was the senior editor of finance. More

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